Att: Traditional Lenders - Question About Due On Sale Clause

[Mindy Jensen]

I always thought that when you transfer title, you trigger the due-in-sale clause in a traditional mortgage.

I see questions time and again from investors who want to transfer ownership of their residential property purchased with a traditional mortgage into their LLC but are worried about triggering the due on sale clause - or worse, don't even know the clause exists.

Some of our (non-lender) members say this never happens. I would think the banks aren't just putting random clauses in their contracts.

Can our institutional lenders chime in on this? 

[Chris Mason]

Originally posted by @Mindy Jensen:

Can our institutional lenders chime in on this? 

 Hi Mindy,

No one internally would consult me before calling a note due, and I haven't had any past clients call me howling that their note was called due. I generally advise caution when asked. I know some folks have done it, however... it's pretty obvious when you're refinancing, you just took this property out of an LLC 5 seconds ago (& we had to get the prelim updated to reflect that), and all your other properties are in an LLC, what's going to happen 5 seconds after closing.

The big question I have is what will happen when the era of historically low rates invariably ends. We've been spoiled into thinking rates below 5% are 'normal' interest rates for the last several years, but historically that simply isn't true.

Let's pretend I'm a loan servicer, not a loan originator: 

If I've got money out there at 4%, and I have some completely valid & legal pretext to get that money back so I can re-lend it at 7.5% because now 7.5% is a normal interest rate again, why the heck wouldn't I?

I would have to balance chasing that 3.5% spread against the possibility that some of those notes I call due go to foreclosure. One way I could do that is by only targeting (for example) NYC, Bay Area, Denver, Sacramento, etc, properties with lots of equity that will still be cashflow positive at 7.5% according to some AVM that I'd run on my portfolio of twenty thousand notes where the owner is in violation (they can see it the instant you put it in an LLC, even if currently they don't do anything), those properties thus flagged of course tending to be prime real estate and cashflow cows, and I'd let the "meh" properties remain in their LLC without doing anything. "Lots of equity and a cashflow machine" is not a protected class the way gender, race, etc, is a protected class, so no one could say that I'm discriminating by only targeting great rental properties with strong equity positions.

Potentially, this means folks are putting their very best properties especially at risk.

However, I'm not a loan servicer. This is just me 'in character' as a heartless and soulless entity run by a board of directors representing stockholders. 

Quick note, you can get Fannie loan to a revocable living trust (still with PG and on your personal credit). If your last name is "Jones," your trust can still be called the "Smith" Living Trust, and you can do this right at closing, meaning that "Jones" never appears in public records at all (a trick celebrities use, or so I hear, after paying a lawyer a zillion dollars in fees to learn about it...). Pair that with a decent umbrella insurance policy, and you've got something that I've seen lawyers say is comparable in many respects to the goodies you get from an LLC.